Yes, my headline is a bit overstated. Panic is too strong. A sudden stop might be a better term. or an (almost) orderly withdrawal. But there is more and more data suggesting that central bank reserve managers added to the stress in the credit markets during the crisis of the fall of 2008.

We have known for a long-time that some central banks shifted from buying huge quantities of US Agency bonds (Fannie, Freddie and the like) to selling fairly large quantities rather suddenly. Big buyers in the second quarter of 2008 were big sellers in the fourth quarter of 2008. And we now know that the world’s reserve managers pulled a fair amount of liquidity out of the international banking system in the fourth quarter as well.

The BIS data (table 5c) suggests that central banks pulled about $200 billion ($192.6 billion to be exact, summing "domestic" and "foreign" currency liabilities to monetary authorities) from the world’s big banks in the fourth quarter. Their euro deposits fell too, by almost $60 billion ($57.6 billion). That no doubt added to the pressure on the dollar liquidity of Europe’s banks: US money market funds and the world big central banks were pulling dollars out simultaneously.

The Fed and Europe’s central banks filled the breach, with their swap lines.

To be clear, when a country’s reserves fall, it has to run down its foreign assets -- whether its holdings of Treasuries, its holdings of Agencies or its deposits with large banks. Emerging economies that ran down their reserves to -- in effect -- finance either capital outflows from their own country or to cover a current account deficit were helping to stabilize the system.

Think of it this way: some central banks ran down their deposits in the world’s banks to help their private banks repay the same international banks. That is stabilizing.

However, that wasn’t all that was going on. Global reserves were down by around $200 billion (my estimate, based on the COFER data) in q4, and dollar reserves were down something like $150 billion.

But central banks pulled close to $200 billion out of the big banks and another $150 billion or so out of the Agency market. That is a roughly $350 billion outflow ...

I understand fully why reserve managers did this. Their core mandate is to make sure that their country has enough safe, liquid foreign assets to meet their country’s needs -- and they over-estimated the safety and liquidity of some key assets. But the net effect of their actions was still destabilizing. They were pulling large amounts of dollar liquidity out of troubled financial institutions that were short of dollar liquidity.

Absent intervention by the Fed, the Treasury and a host of European central banks, a lot more illiquid financial institutions would have failed.

To be sure, emerging market central banks have at times played a stabilizing role in the market. They stepped up their purchases of dollars enormously when private investors’ lost their appetite for dollars in 2006, 2007 and early 2008. That big influx allowed the US to continue to run large current account deficits -- and kept the dollar from falling further. Back then central banks were buying the assets private investors were selling. At a micro-level that was stabilizing, though I think a case can be made that at a macro-level it was destabilizing, as it blocked a needed adjustment in the US, and thus stored up future problems.

In the fall of 2008, though, emerging market reserve managers clearly added to the pressures in the credit markets. They moved money out of big banks at the same time private creditors moved money out of big banks. The overall result was destabilizing.

The conclusion that I have drawn is that reserve managers need to hold assets in good times that they are confident that they can continue to hold in bad times. When times were good -- and when emerging market central banks were buying huge quantities of dollars to offset a fall in private demand for dollars (and large private inflows into the emerging world) -- central banks reached for yield. At the end of the day, though, most reserve managers worry more about losses than returns, and the fear of losses meant that even countries with ample liquidity seem to have moved into the Treasury market, adding to the pressure elsewhere.